Welcome to the Sequans' Second Quarter 2019 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. Before I turn the conference over to our host, Mr. George Karam, I would like to remind you the following important information on behalf of Sequans. This call contains projections and other forward-looking statements regarding future events, our future financial performance and potential financial sources. All statements other than present and historical facts and conditions discussed in this call, including any statements regarding our future results of operations and financial positions, business strategy and plans, expectations for IoT and broadband sales, the potential for new strategic transactions and our objectives for future operations, are forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risk and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made to the Securities and Exchange Commission. Please go ahead, sir.

Thank you, Sean. Good morning, ladies and gentlemen. This is George speaking. I'm with Deborah Choate, our Chief Financial Officer. Welcome to our second quarter 2019 results conference call. Our Q2 results continue to confirm that we are gaining traction in the IoT business, and the recovery of the broadband business is on track. Notably, product revenue is up 49% sequentially in Q2 with both the IoT and broader businesses contributing to this improvement. The other revenue category has a tendency to be lumpy and was lower than normal in Q2, but we expect it to grow as we have a strong pipe of vertical opportunities, specifically in the satellite space. To give you more color on the main growth driver, the IoT business, both CAT 1 products and CAT M/NB, showed very nice sequential growth. Our CAT 1 module for Sprint is moving very well, and the large opportunity with the European carrier we mentioned last quarter has been converted to an official design win for launch next year. Also, we continue to see nice revenue stream via our CAT 1 module partner who continues to add new design wins in the U.S. and Japan. We'll begin to see some volume transition from CAT 1 to CAT M on some CAT 1 location tracking applications beginning in the second half. But this is a good sign long term because it validates the strategy of winning the customer early on with the CAT 1 solution and helping them agree to CAT M/NB if there is no need for CAT 1 features. Also, we continue to see a larger new business opportunities in the pipeline for CAT 1 solutions that require the throughput of CAT 1 and will not migrate to CAT. Here, we have the advantage of being the only…

Hello, everyone. I'd like to add some details about our second quarter results. Our revenue was $8.1 million for the second quarter of 2019, an increase of 15.1% sequentially from the first quarter of 2019 primarily due to the higher revenue in broadband and IoT, partially offset by a decrease in other revenue from vertical customers. Q2 revenue represented a decrease of 36% compared to the same quarter a year ago, and this reflected a decline in broadband revenue as we've previously discussed. In the second quarter, we had three greater than 10% customers, two of which were distributors generally serving a number of OEM and ODM customers. And if we look through to OEM customers served through these distributors, two of them were 10% customers in Q2. Our third 10% customer was an OEM, which is also served indirectly by one distributor. Gross margin in Q2 was 40.1% compared to 41% in Q1 primarily due to a decrease in other revenue and a higher portion of modules in the product mix. This gross margin compares to a 39.4% gross margin in the second quarter of 2018. Operating expenses were $9.8 million in Q2, down from $10.3 million in Q1, reflecting lower average headcount and lower sales and marketing expenses as there were no major trade shows in Q2. Non-IFRS operating expenses were $9.4 million in Q2, down from $9.8 million in Q1 and from $11.4 million in Q2 2018. Our second quarter operating loss was $6.6 million compared to an operating loss of $7.4 million in the first quarter of 2019 and a $7 million loss in the second quarter of 2018. Our IFRS interest expense increased to $2.2 million in Q2. And on a non-IFRS basis, interest expense was $1.2 million. Our net loss in Q2 was $8.9…

Thank you, Deborah. So to conclude, I would like to stress that our three business segments are really doing and moving well. As I said, the broadband is recovering with the new deals in the developed markets and for application, CVRS application. The IoT keeps building up with CAT 1 as an established foundation that keeps growing, and CAT M/NB IoT ramp accelerating obviously first in the U.S. market, followed by -- is going to follow by Japan, where we have very good position today, and all the engagement that will come later in Europe when all those design win will be in mass production. And last but not least, as you know, we keep adding and getting new project in vertical application that will -- that looks like a solid foundation and now an expertise for the company. On the strategic front, as I said, our technology leadership and scarcity continue to attract partners. We have many new engagement -- all -- many engagement, some of them are already engaged previously and some even that we added in the last quarter, and we should conclude more in the second quarter. This helps our financing but more important, it opens for us new markets and ease our go-to-market strategy for -- specifically for mass adoption of IoT. So many thanks for listening. And I would like now to open the call for questions. Sean?

[Operator Instructions]. Our first question will come from the line of Scott Searle from Roth Capital.

George, just to quickly nail down on the cash front. So you've got $3.7 million coming in from R&D tax credits. You've got the backstop for $15 million. Is that at the company's option? And have you determined the terms? And also, as related to the strategic dialogue that you've had ongoing, it sounds like the scope is improving, I would assume then the dollar amounts were improving. So is that overall pipeline from that initial customer larger? And also, with the other, it seems -- sounds like multiple deals now that are starting to come into the funnel. Does that overall increase the dollar amounts related to the licensing opportunity?

Scott, so essentially -- Scott, obviously, as we said, we confirm $3.7 million. So when you look to the balance sheet, definitely, you need to take what we have end of June and then project -- add to this $3.7 million, which is obviously secured because this is typical in France where we have tax credit, and those grants are always coming. It's just only a question sometimes of timing. The worst could happen is a slip of a couple of weeks. But we're expecting this to get it, it in September, as we used in the past. So this is a long -- don't put pressure on us. And as I mentioned, we have a lot of strategic engagement, and we are talking about high single digit with -- and sometimes, even we have one deal which is really more than -- it's two digit, the discussion. We are confident that one of those will close in the second half of the year. But obviously, in light of all this, and mainly, really is not just only to provide some cautious, but also to put the company in a position to be stronger to negotiate those deals because it's never, I'll say, nice to be in a position when you're negotiating a deal and you know that you need the money tomorrow. So we secured with one of our key shareholders, this offer. So we have an offer on the table. It's on the option of the company. And obviously, the terms -- there are typical terms that we used to negotiate there that you have seen that we have done similar in the past, but will be finalized obviously when we draw down the money because it depends obviously on the market condition of our stock.

Got you. And following up on the product front, I think -- are the top line really obscured that the product sales were up 49% sequentially, well ahead, I think of expectations across the board? But just to clarify a couple of items in terms of new product development, where is the Monarch 2 and the Monarch N in terms of tape-out and certifications? It sounds like that revenue will start to contribute maybe in -- from the NB-IoT standpoint at the beginning of next year. And also, on the M1 front, I think you said you had two dozen design wins that are expected to ramp into production. In the past, you talked about some deals that are potentially larger, hundreds of thousands. Are those in those types of numbers?

Yes. So Scott, I mean obviously, just to be clear that we have deals in NB-IoT, even we have design wins already using our Monarch solution today and even some in Japan. And even next year, we'll have NB-IoT deals using the Monarch 1. As you know, Monarch 1 supports both CAT M/NB, and we are in very good position. And you saw as well as some certification happening in Japan with NB-IoT. So this is really related to design win activity. As you know, we put our priority in terms of certification with carrier as the business, I would say, require, and we move the 1 carrier versus the other first just because we have deals there and we focus on the business. In terms of Monarch 2, Monarch N, they are 100% on track. And indeed, we should see them in Q3 as planned. So you will hear more about it. Allow me not to, I would say, give exact timing on this for competitive reason. But the two chips are really moving well as announced and as planned. The beauty about those chips, as we said, that we have a lower-cost solution globally. Much lower power, 60% better than the first generation. And we have a lot of -- extended the feature in those chips. And obviously, from positioning point of view, we'll be the only company in the western world able to offer a dedicated solution for NB-IoT while having in the same time a dual more solution CAT M/NB. And this is the Monarch 2 and Monarch N. As you know, the Asian competitor, they have only NB-IoT. And the western, they used to have CAT M/NB dual mode. And we're seeing a market developing where there is a need for dedicated NB-IoT low cost.…

Our next question will come from the line of Mike Walkley from Canaccord Genuity.

George, just building on the $300 million in future revenue pipeline. Can you just give us kind of the time horizon of revenue and how you see that maybe building through 2020? And I know you're not giving specific guidance. But would you expect that the product revenue that was strong in Q2 to increase sequentially into Q3? And could overall product revenue maybe reach 2018 revenues?

Mike, so I mean, obviously, the -- when we estimated the potential product revenue, we're setting this on the life cycle of the products. And typically, we consider three years, except a few cases where we know that the project is really going to be shorter or longer, but in general, is really three years what we take there. And as I mentioned, this will accelerate because you need to keep in mind that when we talk about potential deals in over three years, the three years are not, I would say, aligned because they are staggard, right? I mean as you have one deal, so that's -- so the ramp, for example, now we have maybe close to 20 -- a little bit around 20 device in mass production already. And we are going to get another [Technical Difficulty].

One moment, please. Ladies and gentlemen, please stand by. Once again, ladies and gentlemen, appreciate your patience. Give me just another moment. [Technical Difficulty].

Hello?

Thank you. And ladies and gentlemen, our host has rejoined. Please go ahead.

Okay. Thanks, Sean. I'm really sorry, Mike. I mean I was addressing your question. So I was talking about the life of -- our future revenue is estimated over three years. And obviously, the three years are not aligned because we have product already launching and others to come. As we move forward, some of the design win will enter into volume next year and even in the second half next year in our estimation. So I want you to consider this. But despite this, when you look to the 2019 and the growth potential that we can have in 2020, obviously we are talking about several times the revenue that we can achieve in 2019 because all this will add up as we move to 2020. Regarding the short-term projection in terms of revenue, allow me not really to give any guidance there. I mean we remain to be -- frankly, we remain sensitive because you're talking about a few deals moving on in terms of product revenue. And in general, we are pleased with the CAT M. It's moving well. But we are -- we have also dependency on other products revenue, and we could have an issue that could happen any quarter. So I don't want to give a projection, but we are optimistic on -- that we will be on target for the second half of this year.

We have a question from the line of Tristan Gerra from Baird.

Since the Huawei ban was enacted, have you seen any renewed interest from non-Chinese customers that previously were looking at using high silicon and any other impact that you may be seeing from those trends that are unfolding?

Tristan, obviously, I mean without commenting the geopolitical, say, impact of this that could be negative and so on for everybody. But if we focus really on the positioning of Sequans, we have definitely a unique position there because we can take advantage of this, specifically in the NB-IoT area because all the NB-IoT technology has been originally driven by the Chinese and all the Asian customer focus on building NB-IoT and dropping CAT M are doing much from CAT M. On the other side, U.S., Europe, I would say, semiconductor company were building CAT M, and they did the NB-IoT just only as a version of software without major change of the cost structure. And Sequans, we took the bet to start like this, but very quickly come with then a solution, which is NB-IoT only that looks like the Chinese version, essentially to address the remaining of the market. And from this point of view, definitely, we have a highway in front of us to be almost uniquely positioned if the Asian, they don't come to this market to serve the market with NB-IoT only. Because all our competitor, the closest to us in the western world, they have solution that they are dual-mode CAT M/NB, which is we have already, as you know, but they don't have a solution, which is dedicated NB-IoT. So this is a plus for the company. But it's very hard to predict the future on this business only as this is related to geopolitics decisions that can change over time.

Okay. Great. And any example you could provide in terms of NB-IoT applications in the pipeline in the U.S.? What will be the type of market segments where we're likely to see that ramp over time?

I mean, first of all, you have -- obviously, there is an overlap between the technology CAT M/NB. What NB can do, often CAT M can do -- that CAT M can do. So the question is more to provide -- if the solution doesn't need more speed, then you can go to NB because you can get really a couple of dollar on the solution cheaper, and application, for example, any small tracker -- for example, all the buy here, pay here services that today, we have a lot of business in this in CAT 1. They can go to CAT M, but they can live as well with NB-IoT. We have as well some unique positioning like, for example, in the U.S. today, at T-Mobile, they have NB-IoT only. They don't have CAT M. So if you're running on T-Mobile NB-IoT alone, so why you pay CAT M when you need NB? Obviously, all the mass market where you have smoke detectors, all those CAT application, NB is much better, lighting application, all the smart cities. So essentially, anything which is just only provide a sensor -- measure the sensor and send it back. And they will be really the most optimized solution from speed point of view. And obviously, it gives you the cost and so on. And we have a couple of application as well related to smart city in Japan and a project, which is we are -- we're engaged in a product, which is 3 million, 4 million unit could be. And NB-IoT is enough for this because it's all about one sensor to -- information to send back.

We have a question from the line of Ari Shusterman from Needham & Company.

Ari on behalf of Raji Gill. So when it comes to operating expenses and costs, what steps have you done to reduce the amount of the company that tends to be profitable at a certain point?

So what we've said all along is that our objective is to average our non-IFRS OpEx at $9.5 million per quarter. So we are on target for that. And I'd say, we have no -- we're keeping those in line and not have -- not expecting those to go higher. No particular additional cost-cutting measures are planned at this time.

What I can add maybe one thing. Obviously, I believe Scott was talking about Monarch 2, Monarch N, which is the new platform where we put a lot of energy in R&D spending. With this, and as you know, it's imminent to be in the market. So obviously, we have less R&D spending on this program. So the company, if you want, we are in a position to engage with the new project for the future. And our plan was more to focus on some new projects, specifically the 5G, by using the existing resources. But obviously, this give us a leverage if we want -- if we have pressure not to go full speed in spending on this and do further saving if we want to do. But for the time being, as Deborah said, I mean we believe there is no need to go further below $9.5 million target to be a match.

Okay. And I have one more quick follow-up. So with regards to gross margins, do you have a long-term target gross margin? And like what makes you confident that you'll be able to achieve this margin?

Yes. The long-term target is to be close to 50%. This is really a question of having the most of our revenues -- most of our product revenues being chip-based rather than module-based. Already on our chips, we tend to have a direct margin that's closer than above 50%. However, with modules, we're typically more in the sort of 25% margin range. On the service revenues and licenses, of course, we have typically a higher margin, closer to 60% or 70%. So when we get into a more scaled rate where chips were, say, more like 80% of revenues with maybe 10% modules, 10% service is kind of offsetting their margins, then we should get close to that target gross margin percentage.

We have a question from the line of Gary Mine [ph], Private Investor.

I'm sorry. Sequans' stock has been out of compliance for about 1.5 months with the NYSE. Is it more likely that it will come back into compliance by the stock price recovering? Or will you be looking at doing a reverse split?

We believe it's more likely it will come back into compliance through an increase in the stock price.

And we have six months, as you know, to be in compliance.

Thank you. And at this time, I have no further questions in queue.

Okay. So many thanks for you attending the call. Pleasure to have you with us and thanks for all your questions. Operator, many thanks.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.